does the wave principle subsume all valid - yelnick

© October 2005 issueOctober 13, 2005

DOES THE WAVE PRINCIPLE SUBSUMEALL VALID TECHNICAL �CHART PATTERNS�?

(Part II, continued from the August 2005 EWT)

Ascending TriangleThe chartists� and Elliott�s ascending triangles are nearly identical in general form and implication, per

Figure 12a. Edwards and Magee affirm, as did Elliott, that �they give advance notice of their intentions�18 forsubsequent price movement. The main difference between the two ideas is that triangles under the WavePrinciple always occur as or within corrections such as in Figure 11c, while chartists also see them in placesthat Elliotticians would view as epiphenomena attending normal Elliott wave development. Figure 12b is anillustration from Edwards and Magee showing a purported Ascending Triangle between dashed lines. I haveadded wave labels to show that this apparent form has nothing to do with an ascending triangle under theWave Principle, either in form (it has only three subwaves) or position.

Figure 12a

Figure 12b

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Formarket

comment,see p. 9

The Elliott Wave Theorist -- October 13, 2005

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NOTES18 Edwards, Robert D. and John Magee. (1966, 5th ed.). Technical Analysis of Stock Trends. Springfield,

MA: John Magee, p.102.19 Frost, Alfred John, and Robert R.Prechter, Jr. (1978). Elliott Wave Principle � Key to Market

Behavior. Gainesville, GA: New Classics Library, p.51.20 Edwards and Magee, p.141.21 Ibid., p.128.22 Ibid., p.153.23 Ibid., p.155.24 Ibid., p.169.

Descending TriangleComments under �Ascending Triangle� pertain equally to Descending Triangles. See Figures 13a and 13b.

Broadening FormationEdwards and Magee�s �broadening formation� is a general description of Elliott�s more specifically

defined �expanding triangle.� Elliott�s triangle, as depicted in Figure 14a, �always occurs in a position prior tothe final actionary wave in a pattern,�19 i.e., just before a top or bottom. Edwards and Magee observe thesame thing about the broadening formation, which �develops most frequently in the later and more �excited�stages of a Primary Bull Market.�20 Figure 14b shows a close-up of a real-life example of Elliott�s expandingtriangle. Figure 14c shows its position in the larger pattern, showing that it occurred in exactly the position thatEdwards and Magee (and Elliott) described. Figure 14d shows one of Edwards and Magee�s examples of a�broadening formation.� Elliott wave labels are added to show that again it occurs in the position that Elliottand Edwards and Magee described. See Figure 5-5 in Elliott Wave Principle for another real-life example.

Figure 13a

Figure 13b


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Figure 14a

Figure 14c

Figure 14b


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Figure 14d

Figure 15a

Figure 15b

RectangleThe chartist�s rectangle is Elliott�s

�sideways� correction, per Figures 15aand 15b. Chartists also see rectanglesat tops and bottoms, but again these maybe deemed a spurious pattern imposedupon normal wave development. Anexample is the apparent rectangle fromFebruary through September of 1976shown in Figure 15c, which is properlydepicted in Figure 14b as part of anexpanding triangle.


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Double and Triple Tops and BottomsAccording to the chartist, these are four distinct patterns. According to an Elliottician, these are not

distinct patterns at all but the occasional result of certain quantitative relationships among two or more wavesnear the termination of a larger wave. Supporting that conclusion are Edwards and Magee�s own words,�True Double Top and Bottoms are exceedingly rare; Triple forms are even rarer.�21 In the unusualcircumstances when wave 5, C or A is relatively short and/or wave 2 or B is relatively long, the market hasthe appearance of a double or triple top or bottom. Figure 16a shows Elliott wave labels imposed uponEdwards and Magee�s example of a double bottom. Figure 16b does the same thing (the solid line has beenadded to delineate a triangle) with their example of a triple top, which is rather strained given that the peaksactually occur at three different levels.

Figure 15c

Figure 16a


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Figure 17a

Figure 16b

DiamondLike the rectangle, �the

Diamond is not a commonpattern.�22 Elliotticians onceagain would explain this fact bysaying that the diamond, whichtypically occurs near markettops, is an epiphenomenonattending occasional timeswhen ending waves areclustered. Figure 17a is a graphfrom Edwards and Mageeshowing a diamond. The Elliottwave labels superimposed uponit are crystal clear. A mid-trenddiamond, such as Edwards andMagee see in at least oneinstance, is simply a complexcorrective wave such asillustrated in Figure 17b, fromElliott Wave Principle.


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Figure 17b

Figure 18b

Figure 18a

Falling or Rising WedgeA wedge is a formation in

which �the price fluctuations areconfined within converging straight(or practically straight) lines, butdiffering from a Triangle in that bothboundary lines either slope up orslope down.�23 This generaldescription is part of Elliott�s morespecific description of a �diagonaltriangle.� Figure 18a shows Elliott�sdepiction of a diagonal triangle.Figure 18b shows Edwards andMagee�s example of a wedge at theend of a trend. I have added Elliottwave labels to show that Elliott�sdepiction accounts for this example.


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Figure 18c

Figure 19

PennantThe appearance of a

wedge intra-trend, whichEdwards and Magee call apennant, may simply outlinethe shape of a single, doubleor triple zigzag under theWave Principle. Figure 18c isfrom Edwards and Magee,with Elliott wave labels addedto reveal a triple zigzag.

FlagA flag �looks like a flag on

the chart.... It might bedescribed as a small, compactparallelogram of pricefluctuations....�24 This isanother example of a generalform that may be imposed uponElliott�s more specific forms.Figure 19 is a chart fromEdwards and Magee, withlabels added to show how wellit depicts an Elliott wave. The�flag� is simply two boundarylines around a zigzag and waves1-2, i-ii of the next advance.Most examples from Edwardsand Magee are single, double ortriple zigzags.

Part III, the final section, will appear in an upcoming issue of The Elliott Wave Theorist.


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MARKET COMMENT

Have a Nice DayThe stock market is behaving nicely. Expect brief, sharp rallies along the way, but don�t mistake the

major trend. It�s a bear market.In the September 13 Interim Report, the final word I wrote was �crash,� the same word that ends my

book title, Conquer the Crash. I do not use that word lightly. The elements are still there: (1) unprecedented� by miles � optimism, both in extremity and duration, despite the major averages being below their all-timehighs for five years; (2) excellent Fibonacci price and time relationships, as graphed in the March 18, June 13(Dow) and August 18 (S&P) issues of The Elliott Wave Theorist; (3) completed wave forms for the 2003-2005 rally, as shown in the July 15 issue; (4) a reversal in the previously strong utilities and secondary indexes,which are now leading the market down; and (5) a recent expansion in downside breadth. It�s a recipe withno missing ingredients.

In the midst of this situation, we read an article today on �Super bulls,� �a slew of strategists� whoexpect �a historic breakout� and have �set [their] sights on 40,000� in the Dow. Some economists, meanwhile,are arguing that Hurricane Katrina will engender an economic boom because its aftermath will spur lots ofbuilding and spending. Along with Frederic Bastiat (Google �broken window fallacy� if you don�t know ofhim), we are not persuaded that disasters make good economic forecasting tools, much less bullish ones, butwe can do one better: We predict a hurricane, a financial and economic storm that will dwarf all others inmodern history, for which we have over 300 years� worth of data. The optimists� �Dow 40,000� forecast, inmy view, is off by at least one zero. If history allows the Dow to fulfill its normal Elliott wave destiny, it willultimately prove to be off by two zeros. (For the full round-trip forecast that Frost and I graphed in our super-bullish 1978 book, see Figure 8-3 in Elliott Wave Principle.)

First waves under the Wave Principle are surprises, but third waves are waves of recognition. Wave1 down in 2000-2003 surprised investors, fulfilling its role. Wave 2 in the Dow ended in March, and wave3 is beginning to gather steam. This should be the �recognition� wave in which investors realize that their oldbelief in a perpetual boom was wrong. One hardly needs an imagination to see what the focal points of thisrecognition will be. The financial and economic worlds have been falling apart while the market has held up.Manufacturing is collapsing in the United States. American companies no longer sport AAA debt, and manyof their bonds are rated junk. Government, corporate and personal debt loads have gone past outrageouslyhigh levels to insane, absurd levels. (Few know this, but New Orleans had borrowed short term just beforethe hurricane simply in order to keep its schools open a few more weeks. Its government officials are lucky,as others won�t have a hurricane upon which to blame their bankruptcies.) The federal government hasrapidly spent itself into deep hock. That event is not a surprise to us, even though �conservatives� run thegovernment, because we predicted that the projected federal surplus under Clinton would peak along with thestock market. Here�s the quote from the August 1997 issue of EWT:

News of the incredible shrinking deficit and the budget agreement have delivered an economic sentimentthat borders on universal elation. As one newscaster put it, �For the first time since man walked on themoon, America is going to have a balanced budget.� This is no more of a cause for celebration than it wasthen, in 1969, when stocks began their worst slide in over 30 years...It puts the U.S. on the same road tofiscal conservatism that it traversed in 1835. In that year, the U.S. came within $35,000 of eliminating thefederal debt altogether. It is as close as it has ever been. That year also brought Grand Supercycle I to aclose. The ensuing 78% drop in the stock market covered 7 years and produced back-to-back depressions.

The budget reversal was dramatic. Since the major averages reached their all-time highs in 2000, politicians�continuing promises � not to mention their actual spending � in the areas of retirement benefits, healthbenefits, the Drug War, the Iraq War, the War on Terror and rebuilding New Orleans for $200 billion (as ifan army could build anything resembling a city!) have gone past fantasy into some other realm.


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THE ELLIOTT WAVE THEORIST is published by Elliott Wave International, Inc. Mailing address: P.O. Box1618, Gainesville, Georgia 30503, U.S.A. Phone: 770-536-0309. All contents copyright ©2005 ElliottWave International, Inc. Reproduction, retransmission or redistribution in any form is illegal and strictlyforbidden, as is continuous and regular dissemination of specific forecasts or strategies. Otherwise, feel freeto quote, cite or review if full credit is given.

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The Elliott Wave Principle is a detailed description of how markets behave. The description reveals that mass investor psychology swings from pessimism to optimismand back in a natural sequence, creating specific patterns in price movement. Each pattern has implications regarding the position of the market within its overallprogression, past, present and future. The purpose of this publication and its associated services is to outline the progress of markets in terms of the Elliott Wave Principleand to educate interested parties in the successful application of the Elliott Wave Principle. While a reasonable course of conduct regarding investments may beformulated from such application, at no time will specific security recommendations or customized actionable advice be given, and at no time may a reader or caller bejustified in inferring that any such advice is intended. Readers must be advised that while the information herein is expressed in good faith, it is not guaranteed. Be advisedthat the market service that never makes mistakes does not exist. Long-term success in the market demands recognition of the fact that error and uncertainty are part of anyeffort to assess future probabilities.

* * * * *Speaking Engagements

Please come and see me at one of the following venues:(1) The Canadian Society of Technical Analysts (CSTA), Montreal Chapter, annual conference, October

15, 2005, at the Marriott Chateau Champlain (514-878-9000). Register at CSTA.org. There is no charge foradmission.

(2) State University of New York, Plattsburgh, NY, November 3, 2005, 7-9 p.m., Yokum Hall. [email protected] if you plan to attend. There is no charge for admission.

(3) Kenos Oil Circle seminar, an international forum on the prospects for oil prices, November 23, 2005, atthe Vienna Boerse Building in Vienna, Austria. Email [email protected] if you wish to attend. Cost is �950.

(4) Golden Gate University, San Francisco, CA, December 14, 2005, 4:30-6:45, Room 2203. [email protected] if you plan to attend. There is no charge for admission.

The final outlet for manic psychology has been real estate, and if preliminary figures are accurate, priceshave already begun to fall in America�s major cities. Banks are leveraged so greatly that the slightestretrenchment in property prices will precipitate an unprecedented downward spiral of evictions and propertysales, and then will come the bank failures. The market is beginning to understand this risk because theBanking Index of 1000 American banks is already under the April low, leading the market down. The current�disconnect� between the stock market�s financial valuation of corporate shares and their economic worth isstaggering. The Dow is still floating above 10,000, and economists are complacent. Meanwhile, we fullyexpect to see bankruptcies, bond defaults, the evaporation of pensions, unemployment, bank failures, economiccollapse and depression. Some still wonder, when will they come? But the trend is already underway. TheU.S. is in fact already bankrupt and poverty-stricken; these facts just haven�t yet become a matter of record.When they do, the public�s anger and dismay will be tremendous because its current expectation of businessas usual is the complete opposite of the reality that�s coming.

There is no point in reviewing all the technical evidence for a bear market; we have detailed that case allyear. It�s up to the market now. Short sellers are poised to reap the rewards of a unique opportunity; neverhas a recorded stock market had so far down to fall. Never have so many other markets � commodities,metals, corporate and municipal bonds � been poised to fall with it. We have also explained the social unrestthat accompanies bear markets. I hope you have gotten all your affairs in order per the recommendations inCTC. If you have, you will suffer no losses or upset at all.

does the wave principle subsume all valid - yelnick

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